The bond market is upside down

Some bond investors are puzzled by the fact that the yield on the benchmark 10-year Treasury is lower now than during the height of the 2008 crisis. Click chart for more on bonds.

NEW YORK (CNNMoney) -- Greece may default. The rest of Europe looks shaky. And so does the United States.

The Federal Reserve is likely to issue another round of asset purchases (just don't call it QE3!) to push rates lower in an attempt to stimulate the economy. So it's no wonder that investors are flocking to the perceived safety of Treasury bonds.

But enough is enough. Is there really a legitimate economic reason to justify a 10-year yield at 1.95%? That's lower than the 10-year ever got during the worst of the 2008 financial crisis. And those dark days (not to minimize the sovereign debt troubles in Europe) were a heck of a lot scarier than now.

The bond market seems to be pricing in a deflationary death spiral in which the entire developed world morphs into Japan. Multiple "Lost Decades" abound for all!

"We are already at record lows," said Mark Zupan, dean of the University of Rochester's Simon School of Business. "And if rates do go any lower, it could be similar to Japan and the miasma that's continued to hang over its economy."

Now don't get me wrong. The economies of the United States and Europe stink. But it's still not a 2008-2009, Lehman-esque stench just yet.

The rush into Treasuries really looks like a bubble when you consider a bunch of factors. First and foremost, inflation may not be a major problem. But it's not dead either.

According to the latest government inflation figures, the so-called "core" consumer price index rose at an annualized rate of 2% in the past 12 months. Typically, the 10-year yield trades a few percentage points above core CPI. So there is a huge disconnect right now.

Long-term bond yields also are rarely lower than dividend yields for major stocks. This is one of those rare times. The average dividend yield for companies in the S&P 500 (SPX) is currently hovering around 2.2%.

"The 10-year being this low is just silly. But it is what it is," said Jason Pride, director of investment strategy with Glenmede, a money manager in Philadelphia.

Pride said Treasuries look "way overvalued" right now and gold, another classic hedge against a sluggish economy, seems similarly overpriced at around $1,800 an ounce.

The reason why investors love bonds and gold is simple. They are terrified of anything that appears risky. And that makes sense to a certain degree.

A Greek default seems almost inevitable. The question is just how "orderly" it may be.

"Imagine a marble that's spinning in a funnel. It's here. It's there. But ultimately it doesn't matter because the marble is going to fall down the hole," said Art Steinmetz, chief investment officer with OppenheimerFunds in New York.

But what happens when the marble falls? Investors may be overreacting if they think that what's going on now in the global economy is actually worse than a few years ago. The fact is that U.S. banks are in better capital shape now than 2008, despite what the recent pummeling of their stocks would suggest.

And even with all the gloomy forecasts for the global economy, nobody is yet predicting serious declines in gross domestic product like we had just a few years ago. Sure, annualized GDP growth of less than 2% doesn't feel all that good. But that's a far cry from a decline of 6%.

"Is the U.S. economy healthy? Of course not. But the economy and banking system can withstand more of a shock now," said Nick Tompras, chief investment officer with St. Louis-based Alpine Capital Research. "There isn't as much danger of Europe causing an epic contraction like we had in 2008 and 2009."

Zupan added that any action from the Fed, likely a so-called Operation Twist in which it sells short-term bonds and buys long-term securities, is already priced into Treasuries. It will be hard for rates to go lower regardless of what happens in Europe.

"Yes, the U.S. is still considered the safest bet in town. But I doubt the Fed will have much influence on the bond market," Zupan said.

Still, any student of market history knows that trying to pick the exact time when any particular asset has hit a peak or bottom is a fool's errand.

Even though Treasuries look like they are ripe for a pullback, which would send their yields higher, Pride said he's not willing to predict when rates will finally start creeping up again.

"This is an upside down market. And it will remain so until we are able to finally get past the headaches of the Europe debacle and the debt situation in the U.S.," Pride said.

And it should be painfully obvious by now that those problems aren't going to be solved overnight. So even if interest rates should eventually move higher, it's impossible to know when the turn will take place.

"There's not a whole lot of money to be made on Treasuries at this point," said Steinmetz."But rates sure can get lower and they probably will."

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.